Short-Term Summary:

Markets remained fairly sanguine over the last week, with U.S. equity indices largely ignoring high-profile headline events. The resumption of geopolitical concerns, after North Korea launched a missile over Japan and a spike of gasoline futures on refinery closures caused by Hurricane Harvey were not sufficient to derail the S&P 500, which ultimately ended the week more than 1% higher. Despite this positive momentum, looming political battles over the budget and tax reform, still lofty valuations, and seasonal headwinds make us doubtful that markets can meaningfully appreciate from current levels.


On the political front, the Trump administration is ramping its efforts to achieve tax reforms/cuts by the end of the year. At a speech in Missouri on Wednesday, President Trump laid out the broad outlines of the White House’s goals including cutting the corporate tax rate to 15% and closing special interest loopholes. The effort, spearheaded by Treasury Secretary Mnuchin and Economic Advisor Cohn, may be complicated, however, by contentious negotiations on the budget and debt ceiling (which must be raised in September). At this point, markets have largely discounted the ability of the administration to achieve reforms on the tax front, meaning a successful effort could serve as an upside catalyst.

Looking forward, 3Q earnings growth is currently expected to be ~5%; a sequential slowdown from the 13% and 10% logged in 1Q and 2Q respectively. This year’s strong growth, after 18 months of an earnings recession, will make for tough comps next year. Despite this, revisions for next year are holding firm. It is also worth noting that tomorrow marks the beginning of September, which has historically been a seasonally tough period for markets. It is normal to see a period of consolidation until near the end of October, when investors begin pricing in Christmas and 1Q strength.


The recent improvement in price action among U.S. indices could possibly generate additional momentum in the near-term, but as we detailed above there are several events on the horizon that are likely to hamper a meaningful move higher. Additionally, the lack of volume in recent sessions indicates that major investors are still absent from Wall Street, not surprising as summer winds down, making any moves suspect. One bright spot is that valuation has retreated to just below 19x. Although still lofty by historical standards, higher P/Es are common in a low inflationary and interest rate environment.


Economic data releases from the U.S. over the prior week were mostly positive, lending support to equity valuations and the “global growth” narrative. Of particular note, the Conference Board Consumer Confidence read for August came in above expectations, at 122.9 vs 120.7, posting its second highest level since 2000. The ADP Employment Change (August) also beat forecasts, potentially foreshadowing a better than expected Nonfarm Payrolls (August)number tomorrow, while GDP Growth (2Q) was revised upward to 3%. This was the first time quarterly GDP growth came in at 3% or better since 2015.

Economic data reported in the past week (actual vs estimate):


Headline Durable Goods Orders (Jul P)- -6.8% vs -6%

Core Durable Goods Orders (Jul P)- 0.5% vs 0.4%

Capital Goods Orders (Jul P)- 0.4% vs 0.4%

Capital Goods Shipments (Jul P)- 1% vs 0.2%

Wholesale Inventories M/M (Jul P)- 0.4% vs 0.3%

Dallas Fed Manufacturing Activity (Aug)- 17 vs 17

Conference Board Consumer Confidence (Aug)- 122.9 vs 120.7

MBA Mortgage Applications (Aug 25)- -2.3% vs -0.5% prev.

ADP Employment Change (Aug)- 237k vs 185k

GDP Annualized Q/Q (2Q S)- 3% vs 2.7%

Personal Consumption (2Q S)- 3.3% vs 3%

GDP Price Index (2Q S)- 1% vs 1%

Core PCE Q/Q (2Q S)- 0.9% vs 0.9%

Initial Jobless Claims (Aug 26)- 236k vs 238k

Continuing Claims (Aug 19)- 1942k vs 1951k

Personal Income (Jul)- 0.4% vs 0.3%

Personal Spending (Jul)- 0.3% vs 0.4%

PCE Core M/M (Jul)- 0.1% vs 0.1%

Chicago PMI (Aug)- 58.9 vs 58.5

Pending Home Sales M/M (Jul)- -0.8% vs 0.3%


Consumer Confidence (Aug F)- -1.5 vs -1.5

Unemployment Rate (Jul)- 9.1% vs 9.1%

CPI Estimate Y/Y (Aug)- 1.5% vs 1.4%

Disclaimers and Disclosures

Investing Risks:  The risk of loss from investing in securities (stocks, ETFs, mutual funds, etc.), bonds, options, futures, and forex or related products, can be substantial.  Investors must consider all relevant risk factors, including their own personal financial situation, before investing.

Investments in bonds and fixed income products are subject to various risks (including liquidity, interest rate, financial, and inflation risks) and special tax liabilities.  

Options Risks:  Options involve risk and are not suitable for everyone.  Options trading privileges are granted at the account level by your custodial broker and are subject to review and approval.  Not all account holders will qualify.  Before trading options, a person must receive a copy of Characteristics and Risks of Standardized Options. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, which can be found on our website  Copies may be obtained by contacting your broker or the Options Clearing Corporation.

Spreads, Straddles, Strangles, and other multi-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.  These are advance option strategies and often involve greater risk, and more complex risk than basic options trades.  

Portfolio Margin:  A portfolio margin account generally permits greater leverage in an account, and greater leverage has the potential to create greater losses in the event of adverse market movements.  Portfolio Margin, or Risk-Based Margin, is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a “security class” or “product group” as determined by the custodial broker’s theoretical pricing model using multiple pricing scenarios.  These pricing scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model.  Clients participating in portfolio margin will be required to sign an agreement acknowledging that their security positions and property in the portfolio margin account will be subject to the client protection provisions of Rule 15c-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act.  Clients will be subject to minimum equity requirements by not only the custodial broker but also the managing firm.

General Disclosures:  Any strategies discussed in this presentation, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell specific securities or strategies.

Investors should carefully consider the investment objectives, risks, charges, and expenses before investing in any investment product.  To obtain a prospectus containing this type of information as well as other important information, contact your custodial broker.  Please read the prospectus carefully before investing.  

You should discuss any/all implications of investing in such products with your custodial broker, financial adviser/advisor, and/or tax advisor.  Past performance is not indicative of future results.  

Third Party Information:  This presentation may utilize or refer to third party data.  In such a case, let it be known that MSCM, LLC. does not control, nor has it developed the content being referred to, and does not make any warranty, express or implied, as to the accuracy, usefulness, timeliness or even the continued availability or existence of said information/content created or maintained by others.  Opinions expressed by others are not necessarily those of MSCM, LLC., nor does MSCM, LLC. endorse, warrant, or guarantee products, services or information described or offered by such firms.

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